3. Get realistic estimates of how much money you'll need to retire. SMI's "Counting Down to a Financially Secure Retirement" worksheets can help you with this task, as can many of the good calculators available at other financial websites. Having specific figures in mind will help motivate you if you need to start saving more, or potentially keep you off the austerity budget if you're doing better than you thought.
4. Review your investing strategy. For many people, this will have already happened years ago as a result of managing retirement plan money at work or IRAs they've established. But how you divide your money between stocks and bonds (which affects your risk level) changes as you move closer to retirement, so it's important to make sure your allocations are still appropriate. See point #5 for young couples for more on this.
5. Maximize your retirement plan at work. Your 401(k) or other retirement plan at work probably represents your best opportunity to quickly save large amounts for retirement. The tax advantages of such an account, which usually include pre-tax contributions, coupled with employer matching or other contributions, make it tough to beat. This isn't true in every case though, so investigate the details of your plan, as well as the investment options offered within it. Most 401(k) plans will allow you to save as much as $15,500 in 2007, and an additional $5,000 if you're at least 50 years old.
6. Take advantage of IRA opportunities. If you're married and your gross income is over $103,000, you probably won't gain an immediate tax benefit from contributing to an IRA. But that doesn't mean it's not worth doing so anyway. Or you may qualify for a Roth IRA, which can provide years of valuable tax-free growth. Remember, your time horizon isn't just until you retire, it's through your retirement, which these days often extends 20-30 years. So if you've maxed out your retirement plans at work, definitely consider an IRA. For 2007, the maximum investment amount is $4,000, and if you're at least 50 years old you can add an additional $1,000 per year.
The Retirement Couple
The big day has finally arrived! Freedom! But with the freedom from your job comes the unsettling loss of that familiar friend: the regular paycheck. That loss of steady income makes many retirees feel like they're at the mercy of the financial markets to a much greater extent than they prefer. Don't panic, you can have peace of mind despite this adjustment. But it's definitely time to make sure your personal financial plan reflects these major changes. Here are the key points:
1. Decide whether to take your company retirement plan money in a lump sum or an annuity. This is an extremely important decision and should be made with great care. If you'll be making this decision soon, schedule an appointment with a CPA or financial planner to talk about which is a better option for you.
2. Re-create your budget to reflect the realities of your retirement income. This doesn't just mean the changing amounts; it means the change in the timing of these payments as well. Match your living expenses to the amount and timing of your income, obviously remembering to include things such as social security income, pension benefits you receive, and so on.
3. Determine your strategy for withdrawing money from your retirement plans. This is a major decision, one you should make with a firm grasp of your income needs (from your newly revised budget). Let's review a few popular options:
- Taking a fixed amount out at regular intervals is simple enough, but it exposes you to market declines and increases your risk of outliving your money more than other methods.
- A slight variation involves taking out a fixed percentage at regular intervals. This improves your odds of not outliving your money, as you take less out if your account balance declines. As long as you are still able to meet your expenses, this can work well.
- Another option that greatly insulates you from market fluctuations is to set aside 3-5 years of living expenses in a money market fund account, and pay all current expenses from that account rather than your investments. History shows that over five-year periods, the stock market has made money an overwhelming percentage of the time. This is a good way to extend your time horizon, allowing you to be slightly more aggressive in your asset allocation, by insuring that you won't be taking money out of your plan disproportionately during down markets.
4. Consider the implications of which accounts you withdraw from when. Traditional IRAs, including IRAs you may have rolled over from your company retirement plan, have mandatory distribution rules that require you to start withdrawing from these accounts at age 70½. Roth IRAs, by contrast, have no mandatory distribution rules, and in fact, get favorable treatment should you die and leave them to your heirs. While this decision requires some individualized number crunching and thought, taking money out of your traditional IRAs rather than your Roth IRAs early in retirement will generally leave you with more flexibility in your later years than vice versa (due to the smaller mandatory distributions you'll incur).
